Stocks sputter as Yellen testifies before Congress

Stocks declined in morning trading Tuesday as investors digested Federal Reserve Chair Janet Yellen's semi-annual economic report to Congress. Yellen raised the possibility that the Fed could lift its key short-term interest rate should the labor market improve faster than anticipated, but she also said the economy needs to strengthen before the Fed raises interest rates.

"In light of corporate earnings being good, retail sales being good, manufacturing being good, even a data-driven Fed chairman is going to have to raise rates earlier than the market really wants," said Doug Cote, chief market strategist at Voya Investment Management. "So all the good fundamental data that should be good for the markets is also hawkish for rates."

Yellen told Congress that the Fed intends to keep providing significant support to the U.S. economy to boost growth and improve labor market conditions, noting that the economic recovery is not yet complete.

Employers added 288,000 jobs last month, the fifth straight month of gains above 200,000. The national unemployment rate has slid to 6.1 percent, a 5 1/2-year low. Yellen noted that if labor market conditions continue to improve more quickly than anticipated, the Fed could raise its key short-term interest rate sooner than currently projected.

WHAT A DRAG: Cigarette maker Reynolds American said Tuesday it plans to buy rival Lorillard for about $25 billion in a deal to combine two of the nation's oldest and biggest tobacco companies. Reynolds fell $2.56, or 4.1 percent, to $60.61, while Lorillard sank $5.03, or 7.5 percent, to $62.19. Other tobacco stocks also declined: Altria Group slipped 98 cents, or 2.3 percent, to $42.37, while Philip Morris International fell $1.08, or 1.3 percent, to $84.87.

SECTOR WATCH: Seven of the 10 sectors in the S&P 500 fell, with energy the biggest decliner. Financials led the gainers.

SPENDING BAROMETER: The Commerce Department reported Tuesday that retail sales rose just 0.2 percent last month, held back by a sharp drop at building materials and garden supply stores. Sales also fell at restaurants and at auto dealers.